The impact of globalization on income inequality for individuals is a much-discussed affair. Far less attention is paid to how it affects inequality in terms of opportunities for companies around the world. The paper, “Do Institutional Reforms Benefit Strong or Weak Firms: Intellectual Property Rights and Access to International Alliances,” takes a look at the latter.

The paper seeks to answer this question: When globalization opens up a country’s economy, does it hurt or help local firms, especially weaker businesses? The paper is based on the research of Wharton management professor Exequiel (Zeke) Hernandez and Wharton doctoral candidate Sarath Balachandran. Hernandez recently spoke to Knowledge@Wharton about their findings.

An edited transcript of the conversation follows.

Knowledge@Wharton: Can you tell us about your paper? What did you set out to discover in your research?

Hernandez: The broad goal we had was to essentially tackle this debate: If policy efforts open up an economy to global markets, will globalization help or hurt companies from countries that adopt those kinds of policies? Now that is a huge question that can’t be answered in just one study. So for this project we just took a narrow slice of that question.

We explore the efforts that countries have made to reform and improve their intellectual property (IP) rights laws [as part of its globalization efforts]. Has this helped companies have more opportunities … to establish alliances or partnerships with companies from other countries?

We are especially interested in who benefits more [among local companies]. Is it companies that already had access to these partnerships [with other foreign companies], what we will call strong firms? Or is it companies that had a hard time doing so before the reforms, what we will call weak firms? I’ll explain why this is important.

First of all, these alliances or partnerships are really crucial for firms from pretty much any country, but especially for firms from emerging markets that tend to have weak intellectual property rights [laws]. And the reason is that these alliances help firms access foreign markets to sell their products, and they also help firms access new technologies and capabilities that then help them upgrade their knowledge and their products. And so, they help them become stronger firms.

“The question is important because inequality is not just about people, but it’s also about companies.”

Let’s say a firm from Chile can use a partnership with a firm from the U.S. to sell in the American market and it can develop a new technology or product from what it learns from that partnership. It is clear that having more access to these partnerships is good for the Chilean company, but the question is, once Chile improves its IP laws, is it the stronger firms in Chile or the weaker ones that will benefit?

The question is important because inequality is not just about people, but it’s also about companies. So for example, we care a lot about markets functioning competitively, [which cannot happen if one or a few companies dominate the economy]. … In an economy in which few firms control valuable resources, such as the alliances that I just mentioned, that could be harmful. All of this plays into the importance of the law as a way to make the playing field level for both individuals and firms.

Knowledge@Wharton: I am just curious, why did you choose intellectual property rights to examine that question?

Hernandez: There are a lot of different changes that countries can make to globalize their markets. … The reason we chose intellectual property rights is that it is actually one of the most important barriers for companies and for countries in order for them to participate in the global economy.

Let’s say you are a French technology company, and you are considering partnering with an Indian or a Chinese firm to sell your product in India or in China. Now if the IP laws of those countries are weak you would be concerned about whether your technology, the trademark, or brand that makes your company valuable, are protected. If your Indian and Chinese partner does something to, say, expropriate or harm your intangible assets, what recourse would you have? The answer is you have almost no recourse if the IP laws are weak.

Surveys of companies doing business in emerging economies show that this issue of intellectual property rights being weak is often the number one concern they have in operating in these markets. And this becomes increasingly relevant as the assets that differentiate companies are intangible — technologies, brands, trade secrets, etc. So we thought that this was not just a good empirical setting, but also a really timely one as a way to see if intellectual property enhances access to foreign markets.

Knowledge@Wharton: In your paper you refer to what is called the Matthew Effect, which is the idea that the rich, with their capital and connections, get richer, while the poor get poorer. Can you tell us more about this?

Hernandez: The Matthew Effect [which is named after the parable of the talents from the Gospel of Matthew in the Bible] is a phenomenon that has been found in many different settings. … In social science, what has been shown is that essentially an economic actor that starts out with more resources — say it’s capital or social connections or any other asset — over time that actor will accumulate additional resources at a faster rate than an actor that starts out with fewer resources. And that leads to a very uneven distribution of resources. So the rich are getting richer, the poor getting poorer.

Knowledge@Wharton High School

Now this applies to our study because we are interested in whether changes in IP laws strengthen or weaken this Matthew Effect when it comes to the ability of companies to access more foreign partnerships with companies. So you could imagine that the IP laws could have two competing outcomes, and it’s not really clear beforehand which will happen.

The first outcome, or the first scenario, is one that actually strengthens the Matthew Effect. What that means is that the strong get stronger, which in our case is that firms that already were able to establish international partnerships now can do it even more after their country improves its IP laws. And that could happen because, say, these firms are more capable, they are more desirable to the foreign partners, and a dynamic like that would lead to an increase in inequality among firms in the economy when it comes to accessing these foreign partnerships.

The other scenario is the opposite, it’s that the Matthew Effect becomes weakened. So here the firms that had a hard time accessing international partnerships benefit the most from the improvement in IP laws, maybe because they lacked the reputation or connections beforehand to attract foreign partners, and the better IP laws now provide a mechanism for them to mitigate the concerns of foreign partners in entering into alliances with these so-called weaker firms. And it is clear that a dynamic like this would lead to a decrease in inequality, because the playing field now becomes more level.

“Intellectual property rights being weak is often the number one concern [companies] have in operating in [emerging] markets.”

Knowledge@Wharton: What were your main hypotheses, and what was the source of your data?

Hernandez: We actually didn’t have a specific hypothesis going into it. Rather, what we had was this idea that there could be these two competing scenarios: The Matthew Effect either becomes stronger or it becomes weaker. Our goal really was just to see which of the two would play out by looking at the data, because it’s hard to predict beforehand which would happen.

In terms of the data, we actually went back about 20 years to the 1990s. And the reason we chose that period is because it was an era of tremendous globalization. In fact, that is the era that seeded everything that happened that is now being debated [in our current political environment]. But it was an era of liberalization, and many countries specifically made efforts to improve their intellectual property laws so that their companies could participate in international markets.

So what we did is we built on some previous research that identified countries that had made meaningful, significant changes in intellectual property rights laws. And from that we identified 13 countries that made credible, meaningful, large improvements between 1991 and 1999. It’s countries like Chile, India, Brazil, Argentina, Thailand.

None of these even today have what we would call an ideal level of IP protection, but during that time they made a significant step improvement. So we identified these 13 countries, and then what we did is gathered data on all of the alliances that firms from these 13 countries established, both before and after the changes in the IP laws. That allowed us to have a very simple research design, which was simply to assess if the number and quality of the alliances they established with foreign companies changed after the improvement in the IP laws compared to the period before.

Knowledge@Wharton: What did you find out?

Hernandez: In a nutshell, what we found is the IP improvements led to a significant and permanent increase in both the amount and quality of foreign partnerships established by firms from those 13 countries, at least on average. But what is more important for our purposes is that we found that this increase in quantity and quality of foreign partnerships was much stronger for firms that had the least access to those partnerships during the period before the IP reforms.

In other words, the benefit was strongest for the weak, which led to the Matthew Effect being weaker, resulting in a more even distribution, or more level playing field, in terms of access to foreign partnerships.

Knowledge@Wharton: You mentioned quality of these international alliances, not just the quantity. Could you talk about that a little bit more? How did you measure quality, and why is that critical?

Hernandez: It is critical. Imagine a scenario where the weak firms get disproportionately more foreign partnership after the reform, but they get the worst, or the least desirable partners — maybe partners from places that aren’t very advanced technologically. That is not a real benefit, that is just an increase in quantity but not quality.

“Emerging countries on net are much better off with strong rather than weak IP rights.”

We felt it was important to actually see if the increase was also one in quality, and who got a bigger increase in quality as a result of these IP reforms. In terms of measurement, [quality] is always a little bit hard to capture at the firm level. So what we did is we used some of the attributes of the countries of the foreign partners as proxies [for the quality of the partners that firms could access across countries].

We used three measures. One measure is the extent to which a country makes high technology exports. Another is the number of science and technology publications in the country. What those two measures have in common is they capture the technological sophistication of the firms from that country, at least on average. And then a third measure is simply the variety or diversity of countries from which firms can find partners. This gets at the ability to access diverse knowledge and ideas through the alliances that these firms establish.

Now regardless of the measure we used, we found something in common: The changes in IP laws led firms to access more partners from these high-quality countries, and partners from a [broader] variety of countries. Again, this effect was strongest for firms that were so-called “weak” during the pre-reform period.

Knowledge@Wharton: Can you talk about the different types of alliances that the companies can enter?

Hernandez: You are referring to a part of the paper where we try to see if the IP reforms led the weak versus the strong companies to increase across specific types of alliances — say partnerships that are about doing R&D, or partnerships that are about marketing or manufacturing. We didn’t really have any hypotheses about this; we just wanted to see if the increase in the number of these different types was different for the strong versus the weak forms.

It turns out that there is no difference, meaning that the weak firms sort of consistently increased more than the strong firms in accessing all kinds of partnerships. So it seems to be that there is some across-the-board benefit of getting access to partnerships for the weaker firms.

Knowledge@Wharton: One of the things that I thought was very interesting in your paper was that you mentioned when these reforms elevated the weak it actually did not also take away from the strong. Can you talk about that a little bit?

Hernandez: This is actually a really important issue, because it would be wrong to interpret our study as showing that IP rights somehow make the weak firms stronger by taking away from the strong firms. That would be some kind of zero sum game where there is no … net gain [in the economy] because you are taking from one to give to the other, which would be kind of a Robin Hood effect. We don’t find that.

“IP laws benefit the weakest firms the most, although they benefit all firms on average when it comes to accessing … foreign alliance partners.”

We find that the weak firms benefit more from the changes in IP laws in a relative sense. That means that relative to the strong firms, the increase in quantity and quality of alliances is greater, but not that the strong firms are hurt. And that is not just important for understanding, say, the distributional aspects of our results. But I think it also is realistic because these so-called strong firms were strong for a reason. And IP reforms don’t weaken those capabilities that made them attractive as foreign partners, it just … creates opportunities for the weak firms. So I suppose that is good news all around.

Knowledge@Wharton: That’s true. Your paper also mentioned that your research has some limitations. Can you elaborate more on that?

Hernandez: The biggest limitation of our work, especially if you think of where we started, was this huge question of the inequality of firms. We really have tackled only a very narrow part of that. And so our claims are also very narrow. Specifically, what we can say is IP laws benefit the weakest firms the most, although they benefit all firms on average when it comes to accessing something very specific, which is foreign alliance partners.

We are really not saying much about a lot of other consequences that IP laws can have, which would have to do with the technological capabilities of firms, their patenting, their ability to create novel products, etc. I am certain that IP laws have some effects that are good and some effects that are not so clearly positive for the economy as a whole. Perhaps there are some consumers that are hurt by IP laws in some cases. And so our findings have to be interpreted as really a small piece of a much larger puzzle.

Knowledge@Wharton: At the end of the day, what are you hoping to do with this research? Are you hoping to influence public policy, for example perhaps encourage governments of emerging countries to adopt strong property rights laws? What are you hoping to achieve?

“In this era of protectionism and skepticism about globalization, empirical facts like these are actually quite relevant.”

Hernandez: The short answer is yes. I hope that the research that we do is impactful. Let’s start with the policy implications. What we found — coupled with a lot of other research that is out there on IP laws — is that emerging countries on net are much better off with strong rather than weak IP rights.

Perhaps to a Western audience [from countries that already have strong IP rights] that sounds like an obvious statement, but there is a lot of debate in emerging economies on whether it is worth formalizing IP rights or not. And I think, again, we are one small piece of the puzzle that says that, yes, on net you are better off doing that.

Knowledge@Wharton: Are there some other practical implications of your research?

Hernandez: I would say two things. Let’s stay more on the policy side for the first one. With the caveat that our paper is addressing a narrow part of a bigger debate, I think it adds one fact in favor of policies that expose firms to global markets and global competition. In this era of protectionism and skepticism about globalization, empirical facts like these are actually quite relevant.

From the standpoint of firms and managers, our study gives them a reason to at least understand that these kinds of policies that expose them to globalization can be good in the long run, and that they don’t necessarily have to have zero sum benefits, that in fact it can make them more competitive. Now of course we need more research to get at that, but I think we start pointing in that direction.

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2 Comments So Far

Anumakonda Jagadeesh

Excellent.
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect, and primarily encompasses copyrights, patents, and trademarks. It also includes other types of rights, such as trade secrets, publicity rights, moral rights, and rights against unfair competition. Artistic works like music and literature, as well as some discoveries, inventions, words, phrases, symbols, and designs, can all be protected as intellectual property. It was not until the 19th century that the term “intellectual property” began to be used, and not until the late 20th century that it became commonplace in the majority of the world.
The main purpose of intellectual property law is to encourage the creation of a large variety of intellectual goods. To achieve this, the law gives people and businesses property rights to the information and intellectual goods they create – usually for a limited period of time. This gives economic incentive for their creation, because it allows people to profit from the information and intellectual goods they create. These economic incentives are expected to stimulate innovation and contribute to the technological progress of countries, which depends on the extent of protection granted to innovators.
The intangible nature of intellectual property presents difficulties when compared with traditional property like land or goods. Unlike traditional property, intellectual property is “indivisible” – an unlimited number of people can “consume” an intellectual good without it being depleted. Additionally, investments in intellectual goods suffer from problems of appropriation – a landowner can surround their land with a robust fence and hire armed guards to protect it, but a producer of information or an intellectual good can usually do very little to stop their first buyer from replicating it and selling it at a lower price. Balancing rights so that they are strong enough to encourage the creation of intellectual goods but not so strong that they prevent the goods’ wide use is the primary focus of modern intellectual property law.
The Statute of Monopolies (1624) and the British Statute of Anne (1710) are seen as the origins of patent law and copyright respectively, firmly establishing the concept of intellectual property.
The first known use of the term intellectual property dates to 1769, when a piece published in the Monthly Review used the phrase. The first clear example of modern usage goes back as early as 1808, when it was used as a heading title in a collection of essays.
The German equivalent was used with the founding of the North German Confederation whose constitution granted legislative power over the protection of intellectual property (Schutz des geistigen Eigentums) to the confederation. When the administrative secretariats established by the Paris Convention (1883) and the Berne Convention (1886) merged in 1893, they located in Berne, and also adopted the term intellectual property in their new combined title, the United International Bureaux for the Protection of Intellectual Property.
The organization subsequently relocated to Geneva in 1960, and was succeeded in 1967 with the establishment of the World Intellectual Property Organization (WIPO) by treaty as an agency of the United Nations. According to legal scholar Mark Lemley, it was only at this point that the term really began to be used in the United States (which had not been a party to the Berne Convention), and it did not enter popular usage there until passage of the Bayh-Dole Act in 1980.
“The history of patents does not begin with inventions, but rather with royal grants by Queen Elizabeth I (1558–1603) for monopoly privileges… Approximately 200 years after the end of Elizabeth’s reign, however, a patent represents a legal right obtained by an inventor providing for exclusive control over the production and sale of his mechanical or scientific invention… [demonstrating] the evolution of patents from royal prerogative to common-law doctrine.”
The World Intellectual Property Organization (WIPO) recognizes that conflicts may exist between the respect for and implementation of current intellectual property systems and other human rights. In 2001 the UN Committee on Economic, Social and Cultural Rights issued a document called “Human rights and intellectual property” that argued that intellectual property tends to be governed by economic goals when it should be viewed primarily as a social product; in order to serve human well-being, intellectual property systems must respect and conform to human rights laws. According to the Committee, when systems fail to do so they risk infringing upon the human right to food and health, and to cultural participation and scientific benefits. In 2004 the General Assembly of WIPO adopted The Geneva Declaration on the Future of the World Intellectual Property Organization which argues that WIPO should “focus more on the needs of developing countries, and to view IP as one of many tools for development—not as an end in itself”
Further along these lines, The ethical problems brought up by IP rights are most pertinent when it is socially valuable goods like life-saving medicines are given IP protection. While the application of IP rights can allow companies to charge higher than the marginal cost of production in order to recoup the costs of research and development, the price may exclude from the market anyone who cannot afford the cost of the product, in this case a life-saving drug. “An IPR driven regime is therefore not a regime that is conductive to the investment of R&D of products that are socially valuable to predominately poor populations”. (Wikipedia)
Libertarians have differing views on intellectual property. Stephan Kinsella, an anarcho-capitalist on the right-wing of libertarianism, argues against intellectual property because allowing property rights in ideas and information creates artificial scarcity and infringes on the right to own tangible property. Kinsella uses the following scenario to argue this point:
[I]magine the time when men lived in caves. One bright guy—let’s call him Galt-Magnon—decides to build a log cabin on an open field, near his crops. To be sure, this is a good idea, and others notice it. They naturally imitate Galt-Magnon, and they start building their own cabins. But the first man to invent a house, according to IP advocates, would have a right to prevent others from building houses on their own land, with their own logs, or to charge them a fee if they do build houses. It is plain that the innovator in these examples becomes a partial owner of the tangible property (e.g., land and logs) of others, due not to first occupation and use of that property (for it is already owned), but due to his coming up with an idea. Clearly, this rule flies in the face of the first-user homesteading rule, arbitrarily and groundlessly overriding the very homesteading rule that is at the foundation of all property rights.
Thomas Jefferson once said in a letter to Isaac McPherson on August 13, 1813:
“If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”
Dr.A.Jagadeesh Nellore(AP),India

Jim Bozin

Policy is one factor but there has to be uniform enforcement with that or it’s feckless. That’s part of the issue, if you take tech to a country, how can it be and who will protect(ed)? It’s the same of patents, even though the laws universally prohibit infringement, the policing burden falls on the patent holder usually. Sure the courts will uphold infringement, but finding and proving the breachs is the real issue especially if distance is large. (Not to mention costly.) So how does one police their IP in a foreign country where they might have no standing?
The reality is how the local culture views IP, is it open or closed to holding materials. There was an attempt to only export older tech in early global forays so as achieve indirect protection, but that quickly gave way to expansion and play the currency and export game to increase profit margins. China has been “accused” of IP theft but from what I saw on the ground, some of it was given, (quid pro quo) and there was no way to stop former employees who had the info from going down the street and opening their own shop because of the low economy of scale. We even had people who took the import empty containers for recycle, resell to local competitors with the labels still on creating a counterfeit black market as imported branded materials commanded a premium. That one’s a little easier, one might get a product complaint from a customer. But it was equally easy to gain access or information from competitors there. Sometimes as easy as simply calling and asking for the info. That’s a cultural issue of what is commonly done and how it’s viewed and is it tolerated. Eg; Communism takes a different view of property than western “developed” countries. So culture’s not really something IP laws will change but is/was the situation on the ground that one has to work in/deal with.